India’s exchange traded funds (ETFs) may be up in the year-to-date frame but recent performances have not been up to the mark. India ETFs have lost in the range of 2.9% to 8.8% in the past month. Analysts are increasingly divided over the future of India’s stock market following an 11-month winning streak. While some predict an upbeat outlook, others are cautious amid signs of slowing economic growth.
Goldman Sachs Lowers Outlook Due to Slowing Growth
Goldman Sachs Group Inc. has shifted its stance on India’s equities, downgrading them from overweight to neutral. This move is driven by concerns over a deceleration in economic growth. According to Goldman strategists, including Sunil Koul, India’s economic momentum is slowing in several areas.
Additionally, deteriorating earnings sentiment, high valuations, and a less favorable economic backdrop are seen as factors that could weigh on near-term gains for India’s stocks. India’s GDP growth is likely to moderate from 8.2% in 2023 to 7% in 2024 and 6.5% in 2025 because the pent-up demand gathered during the COVID-19 pandemic has exhausted, per the International Monetary Fund (IMF), as quoted on Business Standard.
According to rating agency Crisil, India Inc’s revenue growth for the July-September quarter is expected to slow down to 5-7%. This marks the weakest pace of revenue growth in the last four years. The agriculture sector suffered the most.
Other Recent Downgrades
Goldman’s cautious stance is in line with other recent downgrades, such as Bernstein and Societe Generale, both of which have reduced their outlooks on Indian equities, citing weak profit expectations. Goldman also revised its 12-month target for the NSE Nifty 50 Index from 27,500 to 27,000, indicating a likely 10% upside from the current levels.
Despite concerns, the strategists believe a major market correction is unlikely, thanks to strong domestic inflows. However, they expect a market pullback within three to six months.
UBS Sees Opportunity Amid Short-Term Slowdown
In contrast, UBS Global Wealth Management has adopted a more optimistic view, advising investors to “buy the dip” as they believe the current slowdown in India’s growth and corporate earnings is fleeting. UBS argues that the structural case for India remains solid, and any weakness is simply cyclical.
Tan Min Lan, head of UBS’s Asia Pacific chief investment office, highlighted that India is still the fastest-growing economy among G-20 nations. She highlighted that institutional investors still do not have great exposure to Indian equities, leaving considerable room for increased allocations, as quoted on Bloomberg.
Divergence Reflects Uncertainty Over Earnings and Valuations
Overall, there is a growing uncertainty regarding the sustainability of corporate earnings in India. Weakening consumer spending and high valuations are adding to concerns, with some investors predicting a slower upward trajectory for the stock market.
Meanwhile, China can pose a threat as it is adding major stimulus to its economy and has started attracting global funds once again This, in turn, may diminish the appeal of India stock and ETF investing (read: Time to Buy China ETFs Following Billionaire Investors?).
On the other hand, Jefferies Financial Group Inc.’s global head of equity strategy, Christopher Wood, maintains a bullish view on India, calling it the most attractive stock market for the next decade, largely based on its strong earnings outlook.
Time for Low P/E India ETFs?
From the above discussion, it is clear that valuation is a concern for India’s stocks and ETFs. Investors should keep an eye on undervalued ETFs like those with lower price-earnings (P/E) ratio. VanEck India Growth Leaders ETF (GLIN – Free Report) has 12.33X. WisdomTree India Earnings Fund (EPI – Free Report) has 12.38X. First Trust India NIFTY 50 Equal Weight ETF (NFTY – Free Report) has 17.01X.
The ETF GLIN is off 3% in the past month, EPI is down 3.5% and NFTY has lost 4.7%. These ETFs can be bought on the dip. In comparison, Columbia India Consumer ETF (INCO – Free Report) has the highest P/E in the space at 35.18X. The ETF INCO has plunged 7.3% in the past month.